A Merging Of U.S. Airline Minds: 2013 Will Be Better

Largest U.S. carriers see positive financial signs in mergers and capacity restraint

After a year in which their travails and fortunes ranged from an ongoing journey through bankruptcy court protection to a $1 billion profit, the biggest U.S. carriers seem united in their expectation for better—or even better—financial results in 2013. They are optimistic about demand, although wary about the impact on some consumers of expired tax cuts, and believe carriers have learned their lessons about adding too much capacity when business is improving.

They also are beginning their new financial year in various stages of merger negotiation or integration—save for one big exception.

Delta Air Lines already has navigated those waters, having largely completed its integration with Northwest Airlines by late 2010, and its $1 billion profit in 2012 led the U.S. airline industry. The Atlanta-based airline's executives could spend the conference call on the airline's fourth quarter and full-year 2012 earnings talking about non-merger matters such as Delta's investment in an oil refinery and in U.K. carrier Virgin Atlantic, as well as the lead Delta has taken in restructuring regional carrier Pinnacle Airlines to be a low-cost partner for operating 76-seat jets.

On the refinery, Hurricane Sandy forced a temporary reduction in fuel production that contributed to a $63 million loss for the facility in the fourth quarter—adding 7 cents per gallon to the carrier's jet fuel costs. But Delta says it expects the refinery to post a “modest profit” in first-quarter 2013 and become financially stronger during the year.

Delta also talked about more mundane but equally important matters, such as the capacity discipline it believes has been the key to the U.S. airline industry's general recovery. In that respect, at least, CEO Richard Anderson says an American Airlines-US Airways merger would be a positive development because it would strengthen the industry's capacity restraint.

Delta President Ed Bastian sees “prudent capacity deployment” as one of the key factors in the airline's results, especially on the transatlantic services, which included a 7% year-over-year capacity reduction in the fourth quarter of 2012 and an 8-10% cut in the first quarter of 2013.

Even though Delta is optimistic on future demand, it continues to see strong corporate bookings and expects unit revenues to increase 4-6% in the first quarter, its first-quarter capacity will be down 2-4%—with a bigger cut for international than domestic—and may be flat for the full year.

Other than Delta, the waters are churning for the other biggest players in the U.S. market.

Nowhere is that more evident than at United Continental Holdings, the parent company for United Airlines. United paid a heavy price for the operational issues and integration costs from the United-Continental merger, posting a $723 million loss for 2012. It incurred $739 million in costs for items such as systems integration and training, aircraft repainting and other rebranding activities, and the unified labor agreement reached in August with United and Continental pilots included $454 million for lump-sum cash payments.

The country's largest carrier, however, will not be expanding. Citing concerns about global economic growth, the airline expects a 1.5% decline in its full-year capacity after a first-quarter cut of 4.1-5.1%. “We're committed to capacity discipline and achieving our return-on-invested-capital goal,” Chief Revenue Officer Jim Compton says.

US Airways is coming off a strong financial year, with a $637 million profit, and predicting robust growth and a 3% full-year capacity increase as it takes delivery on fleet replacements that have higher seat counts—namely, 16 AirbusA321s and five A330-200s. US Airways plans to retire 21 aircraft this year: 18 Boeing 737-400s and three Airbus A320s.

Total domestic capacity in 2013 is expected to grow 2.7%, while international capacity could increase as much as 3.6%.

Of course, a merger with American Airlines could alter those plans. American, which lost nearly $2 billion in 2012 largely because of Chapter 11 bankruptcy restructuring costs but achieved an operating profit, is trimming capacity in the first quarter but is not saying what will happen after that.

The country's largest low-cost carrier, Southwest Airlines, also has post-merger integration on its mind after reporting its 40th consecutive profitable year: $421 million in 2012.

Southwest's code-sharing and network integration with its AirTran Airways will be phased in by April, allowing single-ticket itineraries that combine travel on both carriers. That will provide a big revenue boost for the remainder of the year, Southwest believes, contributing to its goal for a $1.1 billion increase in annual revenue and 15% return on invested capital. That return was just 7% in 2012.

Southwest's 2013 capacity will be only about 2% higher than in 2012, and that increase will come mainly from the six additional seats it is installing on its Boeing 737-700s and its receipt of larger 737-800s. In terms of trips, Southwest's operations actually will decline 2-3% this year.

This capacity constraint at the largest U.S. carriers—and, in some cases, capacity and route cuts—is encouraging some smaller competitors to take advantage. One of them is New York-based low-cost carrier JetBlue Airways, a smaller but major carrier that, like Delta, does not have merger concerns on its plate.

At $128 million, the carrier's 2012 profit was one of the highest annual tallies in its history in spite of a $30 million hit from the affects of Hurricane Sandy on the New York metropolitan area.

JetBlue's leaders are optimistic about 2013, and the carrier is expanding its capacity by 5.5-7.5% this year, led by increases of 15% in Boston and 10% on Caribbean and Latin American routes.

With the capacity additions, “we're taking advantage of opportunities that are unprecedented,” Hayes proclaims, citing capacity reductions by competitors in markets such as Boston and Puerto Rico—the latter of which has seen American greatly reduce its presence.